E.U. backs Greek budget efforts, vows close monitoring

Greek government bonds rebound on short covering

By

WilliamL. Watts

LONDON (MarketWatch) -- The European Commission "fully supports" Greece's efforts to slash its budget deficit over the next three years but will monitor the government "very closely" to ensure that reforms are put in place, a top European Commission official said Wednesday.

Under the plan, Greece aims to cut its budget deficit from nearly 13% of gross domestic product last year to just below the E.U. limit of 3% by 2012 as it attempts to allay fears over its ability to meet its debt obligations.

The tough measures are "in the interest of the Greek people, who will benefit (from) better and more durable growth and job opportunities in the future, and it is in the interest of the euro area and the E.U. as a whole," said Joaquin Almunia, the European commissioner for monetary and economic affairs.

"The commission fully supports Greece in this difficult task," he said. The commission is the executive arm of the 27-nation European Union.

Almunia said the commission would monitor the execution of the budget plan and reforms "very closely and regularly and welcomes the Greek government's readiness to adopt further measures as and when necessary."

The single currency fell to a seven-month low versus the U.S. unit last week amid worries over Greece's finances. Wednesday's E.C. verdict on the plan was no surprise after E.C. President Jose Manuel Barroso indicated Tuesday night that the plan would receive a qualified endorsement.

Greek government bonds, which have seen yields soar since December on worries over Athens' ability to meet its financing obligations, benefited from short covering Wednesday, traders said. The yield premium demanded by investors to hold 10-year Greek government bonds over their German counterparts shrank to 3.32 percentage points from 3.54 points late Tuesday.

The spread had blown out to more than four percentage points last week, the highest since the launch of the euro in 1999.

"The reaction seems to be fairly positive," said Nick Stamenkovic, economist at RIA Capital in Edinburgh.

With the commission's endorsement of the budget plan, an eventual bail-out for Greece remains a possibility, although it would undoubtedly be the subject of fierce debate and potentially stiff opposition within the euro zone, analysts said.

Greek Prime Minister George Papandreou on Tuesday night ordered a freeze in public salaries, a retirement-age hike and a rise in fuel tax.

"It is a national duty not to leave the country on the edge of an abyss," he said in a televised address.

The measures come on top of already-announced measures to slash public spending. Fears of a potential default by mounted last December after the newly-elected Socialist government revealed that the deficit was sharply higher than previously reported.

The commission said it welcomed the additional measures, while calling on Greece to provide more details on the announced measures and the timetable for putting them in place. The commission also asked for more details about measures to take place in 2011 and 2012.

Greece saw its credit rating cut by major ratings agencies last December and came under heavy pressure from its European Union partners to get its fiscal house in order.

Greece's woes also highlighted worries about other indebted euro-zone countries, such as Ireland, Portugal, Spain and Italy. Yields on Greek government bonds have soared and other so-called peripheral euro-zone countries have also seen their borrowing costs rise, boosting the premium of peripheral bonds over benchmark German bunds.

The concerns have undercut the euro, which lost 5% on a trade-weighted basis between December and the end of January.

While Greece's efforts are welcome, "there are still major doubts over whether Greece will actually achieve the planned rate of deficit reduction, not least because the projections rely on what looks like an over-optimistic path for the economy," said Ben May, European economist at Capital Markets.

"The markets will take some re-assurance from the E.C.'s announcement of stronger monitoring arrangements to avoid "slippages" in the plans. But we suspect that it will take evidence of real progress (the next assessment will come in mid-March), or a stronger indication from the E.C. that it stands ready to support Greece, to fully relieve the pressure on Greek debt markets," he said, in a research note.

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